Demonetization and opportunities for Informal Sector in Indian economy.
January 05, 2017

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Recently old currency notes of rs.500 and 1000 denomination were demonetized by the government of India. It constituted of about 85% of value of total notes in circulation. It was sure to create ripples across the economy especially on the informal sector which relies heavily on cash for day to day transactions.


The informal sector in India contributes at least 50% of our GDP and employs about 90% of our workforce. So they were hit hard. The cap on cash withdrawals and lack of small denomination notes added to the woes of the informal sector. Many of them reported decrease in their business by upto 70-80%. Such a large presence of informal sector in our economy has also led to slowing down of GDP growth marginally and will continue to do so for some time.


But every cloud has a silver lining, the case here also provided informal sector with many opportunities.

·Many of them adopted innovative methods to do transactions such as keeping on accepting old notes for some time as they didn’t have to worry about black money and income tax raids. In Andhra Pradesh vegetables markets started coupon system whereby one can buy coupons for buying vegetables, the money for it will be deducted from his bank account. Vegetable vendors on depositing those coupons in the market kiosks/banks will get money credited in their bank accounts. Such adaptability saw an increase in vegetable selling rather than decrease due to demonetization.

·Similarly many of the vendors and informal sector businesses were already using mobile applications such as paytm. In Delhi small vegetable vendors were accepting payments from paytm long before demonetization took place. Such technology based payment system was letting them combat the menace of getting change money already.

·It thus provides an opportunity to informal sector to move towards cashless system, adapt to new technologies, grow their businesses rapidly as others have done and move towards formalization. The faster they adapt the faster they will grow, Andhra’s vegetable market example shows this.

·Further it will help small businesses to keep accounts easily, calculate their cash flows, incomes and profits easily

·The demonetization has also resulted in increased cash flows to banks. As a result they are now ready to lend money at lower interest rates. Informal Sector/small businesses are going to be the biggest beneficiary of lower interest rates.




·Many informal sector businesses fear that by adapting to new ways of accounting and usage of technology will bring them under increased tax net. This is a wrong notion, under proposed GST self assessment power is given to small businesses upto annual turnover of Rs 20 lakhs (earlier it was 10lakh under VAT). The tax for them thus will be minimal and no harassment from tax officials will occur to them.

·Lack of smart phones and internet penetration can hinder growth of digital payments systems and thus informal sector business. But we do have a teledensity of 80% (i.e. about 80% of our population owns a mobile phone). Mobile phones other than smart phones are also capable of transactions by using *99# USSD/SMS gateway. Similar USSD/SMS based payment system has been successful in Kenya and other African countries and helped small businesses to grow rapidly. So if they can do it, why can’t we?

Finally, it all boils down to adaptability and acceptability of businesses and people which could make such a move a success, leading to a permanent shift in the ways businesses transact and putting India on a faster and inclusive growth trajectory. It is a short term pain for long term gains.